Tyre makers are headed for a rough patch as the price of natural rubber has surged more than 33% on-year in just the first five months of this fiscal amid strong demand and crunched supply, which could strain profitability.

Domestic prices of natural rubber closed August at Rs 238 per kg on average, way above the trend in the past decade.

The last time the commodity breached the Rs 200/kg mark was in 2011, propelled by demand recovery after the Global Financial Crisis, aided by the accommodative stance of the US Federal Reserve and other central banks. Prices had logged a compound annual growth rate of 101% between 2008 and 2011. However, the three-year surge did not sustain and for a decade thereafter prices remained subdued below Rs 150 per kg on average.

Now, since the end of 2023, prices have shot up again amid a raft of challenges. Tight supply of natural rubber globally has cast a long shadow on the industry even as steady expansion of the automobile industry and other major consuming industries keeps demand healthy.

And this upcycle is distinct from previous ones.

Says Pushan Sharma, Director-Research, Market Intelligence and Analytics, “While the previous spikes were triggered by isolated events such as farmer protests over low profits in 2016 or the pandemic-induced labour crisis in 2020, the current price rise is rooted in fundamentals, i.e., demand and supply dynamics. In 2011, the natural rubber market had sufficient supply to cater to global demand. Between fiscals 2011 and 2023, however, global production grew 35%, while demand expanded 40%, resulting in supply crunch and, thereby, higher prices.”

That has a huge bearing on the profitability of tyre makers as natural rubber is a major input, accounting for 20-40% of the weight of tyres, depending on the category. Indeed, the tyre industry accounts for around 80% of natural rubber consumption in the country.

The margins of tyre original equipment manufacturers (OEMs), therefore, have a negative correlation with prices of natural rubber. In the first quarter of this fiscal, for instance, the operating margin of the top five Indian listed tyre manufacturers declined ~200 basis points to 14%, compared with 16% in fiscal 2024, as natural rubber prices shot up 22% on-year.

Says Mohit Adnani, Associate Director- Research, Market Intelligence and Analytics, “With further rise in demand and restricted supply, the prices of natural rubber are expected to remain elevated, impacting the margins of tyre manufacturers well beyond fiscal 2025. The deficit in the natural rubber market is expected to triple in 2024 as smaller tappable area and lower yield, along with a potential increase in demand, test the supply side.”

In addition, while crude oil prices are expected to ease, leading to a decline in the cost of crude-based raw materials such as styrene butadiene rubber, poly butadiene rubber, carbon black, and nylon tyre cord fabric, the rising cost of natural rubber is likely to drive up CRISIL's Basic Tyre Raw Material Index, which tracks the prices of these commodities. This fiscal, the index is expected to print 4-6% higher, reversing a 5% decline last fiscal.

In the milieu, it becomes imperative for tyre OEMs to explore ways to mitigate the impact of a prolonged supply shortage, such as developing alternative supplies or reducing costs by exploring imports from cheaper destinations.